International and global stock funds can be an important part of a diversified portfolio. Like all mutual funds, international and global stock funds can potentially invest in a large number of securities, giving you a cost-effective way to own shares in many different companies. However, unlike domestic stock funds, which invest primarily in US companies, international stock funds primarily invest in companies outside of the US. Global stock funds have the ability to search for investments in both US and non-US companies, helping you take advantage of the opportunities presented by the global economy. Understanding the difference between international and global stock funds, as well as their potential advantages and risks, is an important part of international investing.
Advantages of international and global stock funds
Diversification
International and global stock funds typically own many individual stocks in different countries and across different industries. This can offer investors multiple layers of diversification, including geographical, currency, and sector, thus reducing the chances that the performance of a single stock or instability in a single country can negatively impact the performance of the entire portfolio.
Capital appreciation and income
International and global stock funds have the potential to offer greater capital appreciation than domestic stock funds. However, that increased potential comes with greater risk. Investing in international markets may also offer a broader variety of income sources when compared to investing solely in US stocks. For those saving for retirement or other long-term goals, this kind of growth potential can be key to helping your savings keep pace with inflation.
Professional management
Professional portfolio managers and analysts have the expertise, technology, global reach, and language skills needed to research companies and analyze market information before making investment decisions. This level of expertise and access to this kind of information are difficult, if not impossible, to come by for most small investors.
Liquidity and convenience
All mutual funds allow you to buy or sell your fund shares at each business day’s closing net asset value. You can also automatically reinvest any income from dividend and capital gain distributions or make additional investments at any time. For most stock funds, the required minimum initial investment may be substantially less than what you would have to pay to build a diversified portfolio of individual stocks.
Risks of international and global stock funds
As with any investment, international investing carries risks, including some unique to international markets, such as currency risk or changes to economic, political, or regulatory conditions. These risks can be magnified in emerging or developing countries due to their less regulated markets and economies. In some cases, these factors can cause greater volatility of stock prices and fund performance. Investing in mutual funds, rather than individual stocks, can be a way of mitigating some of the risks described below.
Economic risk
This refers to the stability of a country’s economic climate. A country with stable finances and a relatively strong economy is likely to provide a more reliable investing environment than a country with weaker finances or an unsound economy.
Political risk
This risk refers to a country’s political climate and how that climate may result in unanticipated losses to investors. Political risk is sometimes referred to as the ability of a country to maintain a hospitable climate for outside investment. Even if a country's economy is strong, an unfriendly political climate (or one that becomes unfriendly) to outside investors could present a greater risk to investors.
Currency/exchange rate fluctuations
The exchange rate between a country's currency and the US dollar fluctuates constantly. This can impact the dollar value of an investment, even if the security's price remains unchanged. In some cases, though, currency fluctuation can work in your favor. For example, returns on foreign stocks are increased when the dollar's value falls relative to other currencies.
Less information
In many cases, foreign markets and the stocks issued by foreign companies are not as widely followed by financial analysts. As a result, investors may have to make decisions based on information that may not be as complete as when they are investing in US securities. However, this can also present an opportunity for active managers to use research capabilities to potentially identify and take advantage of less-known securities.
Reduced liquidity
In some foreign markets, securities trade with much less frequency. This reduced liquidity could make it more difficult to buy or sell certain securities, which could either reduce the profits you’ve made or increase your losses if you're forced to sell shares.